Monopoly, Economics

1. Monopoly
SOURCES:
HIRSCHEY, M. (2008). FUNDAMENTALS OF
MANAGERIAL ECONOMICS. CENGAGE
LEARNING.
PAUL, K., & YOUNG, P. K.
(2003). MANAGERIAL ECONOMICS.
PRENTICE HALL, UPPER SADDLE RIVER.

2. Pricing and
Output
Decisions in
Monopoly
Markets
 A monopoly market consists of one firm.
 The firm is the market.
 Power to establish any price it wants.
 The firm’s ability to set price is limited by the
demand curve for its product, and in particular,
the price elasticity of demand.

3. Pricing and Output
Decisions in
Monopoly Markets
 In the graph, assume
 Demand is linear which implies
that MR is linear and twice as
steep.
 Diminishing returns.
 How much should the firm
produce to maximize profit?

4. Pricing and Output
Decisions in
Monopoly Markets
 Using the information in the
following table, determine how
much the firm should produce
in order to maximize profits.

5. Pricing and Output Decisions in
Monopoly Markets
Graphically:
Set output where MR=MC
At this output, read the price to set off of the demand
curve.
Profits = rectangle ABCD
Q1 and Q2 with P1 and P2 will have too little Q with to
high P and too much Q with low Q respectively and
this generates lost of profit
Q1 Q2
P1
P1

6. Social Benefits of Monopoly
1. Existence of Natural Monopoly
Long Run Average Cost are still declining
Insufficient demand to cater even one
minimum efficient scale (MES) plant
competition will lead to increase consumers
cost
2. Invention and Innovation
 Patents (leads to Monopoly)

10. where it has inverse relationship

12. Monopoly Strategies

16. 1. Solve for Q and P
that will generate
maximum profit
using calculus
2. If tax will increase
wherein additional
output will increase
tax by 0.5 what will
happen to the
Optimal Output
and Price?
Note: MC+tax